2015 GS Paper I, all questions

UPSC Prelims 2015 · GS Paper I

Question 22: Economy and Social Development

When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen?

aIndia's GDP growth rate increases drastically
bForeign Institutional Investors may bring more capital into our country
cScheduled Commercial Banks may cut their lending rates
dIt may drastically reduce the liquidity to the banking system

AnswerUPSC’s answer is (c).

The Statutory Liquidity Ratio is the share of deposits banks must hold in cash, gold or approved securities. Cutting it by 50 basis points frees a small part of bank funds for lending, so banks can lend more and may reduce their lending rates. The effect is modest, so claims of drastic changes in growth or liquidity are wrong, and it does not directly attract foreign institutional investors.

Why each option is right or wrong
  • (a) A 50 basis point cut cannot lift GDP growth 'drastically'; the effect is small and indirect.
  • (b) FIIs respond to returns and the exchange rate, not directly to an SLR cut.
  • (c) Correct: lower SLR frees funds, so banks may cut lending rates.
  • (d) The cut adds to liquidity; it does not reduce it, and the change is small.

Answer: UPSC’s key. Explanation: written by UPSC Grade, not by UPSC.

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Source: UPSC, Civil Services (Preliminary) Examination 2015, General Studies Paper I, Series A. The paper on upsc.gov.in.